Bernanke: Raise the Debt Ceiling
Today, in a speech to the Committee for a Responsible Federal Budget, Federal reserve Chairman Ben Bernanke reiterated his position that long-term budget reduction is essential, but moving too soon could be harmful to the economy. Thus, he favors committing now to a plan to reduce the budget deficit, but waiting until the economy is on better footing before putting the plan in place:
Fiscal sustainability is a long-run concept. Achieving fiscal sustainability, therefore, requires a long-run plan, one that reduces deficits over an extended period and that, to the fullest extent possible, is credible, practical, and enforceable. In current circumstances, an advantage of taking a longer-term perspective in forming concrete plans for fiscal consolidation is that policymakers can avoid a sudden fiscal contraction that might put the still-fragile recovery at risk. ...
What would such a plan look like? Clear metrics are important, together with triggers or other mechanisms to establish the credibility of the plan.I have called for something similar, e.g. a deficit reduction plan that kicks in automatically with spending cuts and tax increases once unemployment crosses a predetermined threshold, and I have no quarrel with the general idea. I wish he's support near term expansion of fiscal policy targeted at job creation, but at least he's working against the inclination toward immediate austerity that has infected the political process.
But to me the most notable part of the speech was his warning about the debt ceiling:
Recently, negotiations over our long-run fiscal policies have become tied to the issue of raising the statutory limit for federal debt. I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job. Failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation.I doubt lawmakers will pay much attention, it's just one more warning among many from economists and other analysts. But this may have more impact:
[The US Chamber's Tom] Donohue was asked if Congress was going to raise the debt ceiling. Yes, it will be raised, Donohue answered, mainly because the country can not afford to not pay its bills. To those newly-elected representatives who say they aren't going to raise the debt ceiling and will shut down government, Donohue said the U.S. Chamber has its own message: "We'll get rid of you." He then went on to praise U.S. House Speaker John Boehner for his Congressional leadership. "He's growing into his shorts," Donohue said. "He's put on his big boy pants."If they've lost the Chamber of Commerce, they've likely lost the battle.
At least I hope they've lost the battle because Ben Bernanke is correct. Failing to raise the debt ceiling would be a disaster, as would substantial budget cuts before the economy is on better footing. If you put those two things together, that means Republicans need to accept a debt limit increase without insisting on substantial budget cuts if they want to avoid putting the economy at risk. That doesn't mean we can't make progress, an agreement about how to proceed once the economy can handle it would be a large step forward. But it does mean we need to be careful not to get in such a hurry to solve our long-run budget problem that we end up making things worse instead of better.
We should commit to a budget reduction plan now, and a credible plan must include both tax increases and spending cuts -- spending cuts alone are not enough -- but the implementation should wait until output and employment are closer to normal levels.
